Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Corporate Pricing Power Is Fading Under Stagflation
Transcript
- Lucas: There's a shift happening in corporate America that doesn't get enough airtime in the stagflation narrative. For the last two years, companies had enormous pricing power — they could raise prices and consumers mostly absorbed it. That era is ending. Luna: You're seeing that in earnings calls, right? The word 'pricing power' is showing up way less. Lucas: Exactly. If you look at transcripts from early 2025, around 68 percent of companies in the S&P 500 mentioned pricing power as a tailwind. Fast-forward to this most recent earnings season, that number is down to 43 percent. That's a huge drop in a short period. Luna: And it's not just tech companies or discretionary names. I saw the same pattern in consumer staples — which are supposed to be the safest bet for passing through costs. Lucas: Right, and that's the part that really tells the story. Take a major packaged-foods company — I won't name it because the pattern is industry-wide — but one of the big ones raised prices by about 12 percent year-over-year in early 2025. Their latest quarter showed flat volumes. They kept the price hike, but unit sales didn't grow. That's the classic stagflation pinch: you can still charge more, but you can't sell more. Luna: So margins are getting squeezed from both sides. Input costs are still high — energy, labor, logistics — but you can't keep passing it through because the consumer is tapped out. Lucas: Consumer sentiment hit a fresh record low just this week, as the Iran situation rattles energy markets again. CPI came in at 332.4 for April, still creeping up. The core PCE deflator is at 129.3, which is also higher. So inflation is stubborn. But the consumer is clearly under strain. Luna: And that's the stagflation bind, isn't it? If the Fed raises rates to fight inflation, it risks crushing demand even further. If they cut, inflation could accelerate again. Lucas: This is exactly the dilemma that incoming Fed Chair Kevin Warsh will inherit when he's sworn in this Friday. He's taking over at a moment when the traditional playbook doesn't work. You can't just target demand when supply is constrained and expectations are fragile. Luna: There's also a structural shift happening beneath the surface. The AI economy is creating some productivity gains, but it's also reshaping which industries have pricing leverage. Blue-collar workers in certain sectors are seeing wage growth, but that adds to cost pressure for companies. Lucas: That's the paradox. Average hourly earnings are up to $37.40, which is good for workers, but it's a cost input that doesn't come with the same productivity offset in every industry. For a services firm, higher wages might mean higher prices. But if demand is weak, you can't pass that through. Luna: So which companies are still managing to hold pricing power? It seems like it's mostly in areas with very inelastic demand — healthcare, some utilities, maybe a few specialty tech products. Lucas: Exactly. But even there, you're seeing pushback. The bond market is flashing warning signs. The ten-year breakeven inflation rate has actually ticked down to 2.39 percent from 2.44 percent a month ago. That suggests bond investors think inflation will moderate, not because the Fed is winning, but because demand is weakening. Luna: That's a pretty grim signal for corporate revenue. If the bond market is betting on cooling demand, then companies expecting to keep raising prices are going to be disappointed. Lucas: And that's the real risk for equity markets. The S&P 500 is at 7,492, which is up about 1.2 percent over the last five days. But that's happening alongside negative real earnings revisions. If margins compress and revenue slows, the current valuation becomes harder to justify. Luna: It's interesting because the small-cap Russell 2000 is up more than 3 percent over the same period. That might reflect some optimism that the domestic economy is more resilient, but small companies typically have less pricing power, not more. Lucas: Right. Small caps are more exposed to domestic demand, which is still holding up in some areas. The job market is still relatively tight — initial jobless claims came in at 209,000, down from 212,000. But JOLTS job openings fell to 6.866 million, which is the lowest in a while. So the labor market is cooling, just not collapsing. Luna: It feels like we're in a period where the old correlations are breaking down. Normally, falling pricing power would mean falling inflation. But because supply shocks — energy, geopolitics — are still pushing costs up, we get this weird mix. Lucas: That's the stagflation signature, as we've been saying in this series. And I think this is the episode where we really need to talk about how listeners can think about their own exposure — whether as investors, employees, or business owners. Luna: Before we go there — and I know this is a bit meta — but I think it's worth mentioning that the reason we can have these in-depth, ad-free conversations is because of listener support. Lucas: Absolutely. We don't run ads, and that's a deliberate choice. If you want to support keeping this accessible and independent, the simplest way is buy me a coffee dot com slash fexingo. It genuinely makes a difference. Luna: Yeah. Even a small contribution helps us keep going. Now, Lucas, you were saying about how listeners should think about this shift? Lucas: Right. So if you're an investor, the key question is: which companies have genuine pricing power that can't be easily competed away? Think about businesses with high switching costs, network effects, or essential products. The ones that are just riding a wave of brand inertia are the most vulnerable. Luna: And if you're a business owner, it's probably time to focus on operational efficiency rather than relying on price increases. Because the window for easy pass-throughs is closing. Lucas: Exactly. The companies that will survive this phase are the ones that can protect margins through productivity, not just pricing. That's where the AI and automation investments we talked about earlier could really pay off. Luna: Let me pull up one more data point. The share of companies citing 'volume growth' as a driver on earnings calls has actually increased to 52 percent from 44 percent a year ago. That tells me that the narrative is shifting from 'we can charge more' to 'we need to sell more.' Lucas: That is a really important metric. It means management teams are acknowledging that they can't just rely on price. They have to grow unit volumes, which requires real demand. And in this environment, that's tough. Luna: So where does that leave the Fed? If pricing power is fading and demand is softening, but inflation is still above target, is there a path to a soft landing? Lucas: I think the soft landing narrative is getting harder to sustain. The real economy is showing cracks — even if the headline numbers still look okay. Real GDP growth annualized was 2 percent in Q1, which is decent, but that was up from just 0.5 percent in the previous quarter. That kind of volatility is not a smooth landing. Luna: And with Kevin Warsh coming in, we might see a more hawkish tilt. He's known for being concerned about inflation overshooting. But if he tightens too much, he could break something. Lucas: That's the trillion-dollar question. The bond market is already pricing in some easing expectations later this year, which is why the ten-year breakeven is down. But if Warsh comes in and signals a more aggressive stance, yields could spike, and that would tighten financial conditions further. Luna: It's a tough moment for anyone making business decisions. The signal to noise ratio is terrible. Lucas: That's why we do this show — to try to cut through some of that noise. The fading of pricing power is one of those quiet signals that tells you a lot about where we're headed. If companies can't raise prices, then the adjustment has to come somewhere else: margins, employment, or investment. Luna: And that adjustment is probably already underway. The JOLTS data showed fewer openings, and we're seeing some high-profile layoffs in tech and media. It's not a wave yet, but it's a trend. Lucas: Right. So for the listener, the takeaway is: watch pricing power as a leading indicator. If a company you follow or work for starts talking about 'value' or 'volume' instead of 'pricing,' that's a signal. And for the broader economy, it's another piece of evidence that the stagflationary environment is real and durable. Luna: Thanks for listening to this episode of Stagflation Conversations. We'll be back next week with another angle. In the meantime, if you found this useful, buy me a coffee dot com slash fexingo. Lucas: Take care.